A Dispute with a Merchant Cash Advance Funder
If you’re a San Jose business and you’re in a dispute with a merchant cash advance funder, you may need a San Jose lawyer. But you may not need that San Jose lawyer – not at first, at least. If the MCA agreement your Santa Clara County merchant signed is typical, it chooses New York law and New York courts. If the funder sues, a San Jose lawyer is not going to matter much. The lawyer who will matter is a New York lawyer who can appear in a New York court. A San Jose lawyer will matter a lot later, when a New York judgment gets brought back to California for collection. Or when you try to litigate at home. Or when bankruptcy becomes a very practical option. It may be that the first person you call needs to be a settlement negotiator or bankruptcy attorney, not a litigator.
The easy part: Funders distinguish a merchant cash advance from a loan by claiming they’re purchasing a business’s receivables. Repayment is typically by daily or weekly debits from the business’s bank account. This distinction is critical: usury laws apply to loans, not sales. Whether an advance is a true sale or a disguised loan defines almost every defense that a merchant can raise.
Commercial Financing Disclosure Statute
California has a commercial financing disclosure statute. It’s been applied to merchant cash advances. SB 1235 (enacted in 2018 and now codified as California Financial Code section 22800 et seq.) was the bill that required disclosure of the cost of commercial financing transactions of $500,000 or less. California Department of Financial Protection and Innovation implementing regulations were issued and went into effect on December 9, 2022. “Sales-based financing” is a category of transaction and estimated APR must be disclosed. A challenge to the regulations by the industry was rejected by a federal court in January 2024. The law requiring APR disclosure was made permanent by SB 33. SB 362 (enacted in October 2025) prohibits the misleading use of “interest” and “rate” and requires the use of APR terminology in certain circumstances. These laws require funders to be transparent about the cost, but they don’t automatically make an MCA into a loan.
Prohibited Fees
California MCA Funders’ Prohibited Fees for Small Businesses: SB 666, effective January 1, 2024, bars MCA funders from charging certain fees for financing of up to $500,000, including ACH debit fees, due diligence fees, and UCC lien termination fees. SB 666 applies to California small businesses with 100 or fewer employees and average annual gross receipts of $15 million or less. Many independent shops, restaurants, and contractors in and around San Jose may have leverage when it comes to negotiating or contesting a claim if their contract requires such fees.
Usury Cap
California’s Usury Law Is in the State Constitution: Article XV of the California Constitution limits interest rates on non-consumer loans to the greater of 10% or 5% plus the Federal Reserve discount rate. California courts will not hesitate to go beyond the face of a transaction. In Milana v. Credit Discount Co. (1945), for example, the California Supreme Court reclassified an alleged sale of accounts receivable as a usurious loan because the seller guaranteed the payment of every account. But watch out: the usury cap does not apply to lenders licensed under the California Financing Law. Many MCA providers are, so even if the transaction were recharacterized as a loan, you would not necessarily have a usury victory on your hands.
Forum Selection Clause
Contractual forum and choice of law provisions can take a San Jose merchant out of his home court. A California Court of Appeal in G Companies Management v. LREP Arizona (2023) refused to enforce a forum selection clause in favor of an Arizona court because it would have deprived the borrower of the constitutional defense to usury. But in an older case from the First District, Ury v. Jewelers Acceptance Corp. (1964), the court said just the opposite. In EpicentRx v. Superior Court (2025), the California Supreme Court concluded that forum selection clauses should generally be enforced. It disapproved of an older case, Handoush, that refused to enforce a forum selection clause in favor of New York. You can still keep an MCA case in Santa Clara County, but the merchant will be at a disadvantage.
Confession of Judgment
Confessions of judgment are (mostly) dead to California merchants. SB 688 made confessions of judgment unenforceable in California, effective January 1, 2023, amending Code of Civil Procedure section 1132 so a superior court in California can no longer enter a confession of judgment. It does not apply to confessions obtained or entered before that date. New York stopped up that end of the tunnel earlier.
Effective August 30, 2019, CPLR 3218 was amended to require a confession of judgment to be filed in the county in which the defendant-resident was living when they signed it. A merchant based in San Jose who never lived in New York can’t be confess-judged there. Courts have declined to apply the amendment to affidavits of confession signed before that date, but judgment can’t be entered more than three years after signing.
File a San Jose MCA Case
Where can you file a San Jose MCA case? You can file a San Jose MCA case in a New York state court pursuant to the forum selection clause. You can also file an MCA case in Santa Clara County Superior Court. The civil departments for that court are located in the Downtown Superior Court at 191 North First Street and the Old Courthouse which is just next door. The third place that the case can be filed is the federal Northern District of California. The San Jose courthouse is located at the Robert F. Peckham Federal Building, 280 South First Street. That is also the location of the San Jose division of the bankruptcy court. That division includes the counties of Santa Clara, Santa Cruz, Monterey and San Benito.
Sister State Money Judgments Act
But you can’t just send a New York state judgment to a San Jose bank account. The funder has to file it under the California Sister State Money Judgments Act, Code of Civil Procedure sections 1710.10 through 1710.65. The clerk makes an entry as of right, without review. The merchant then has 30 days after being served with the notice of entry of judgment to file a motion to vacate under section 1710.40. The motion can assert any defense that would defeat an action on the judgment, like lack of jurisdiction, fraud, or payment. A writ of execution generally cannot be issued within those 30 days, and a timely filed motion stays execution. A federal judgment out of New York has a different procedure. It can be registered in the Northern District under 28 U.S.C. § 1963, without notice to the debtor, and then enforced as any other local judgment.
That’s where a San Jose lawyer comes into the picture. When they have 30 days to respond in Santa Clara County Superior Court, when there are levies on local bank accounts, and when their assets are in California, California counsel makes sense. Or when they’re filing Chapter 11 in the San Jose bankruptcy division, and an automatic stay is kicking in to stop the collection while the business is reorganized. But before any judgment is entered, how do you defend a lawsuit in New York? A San Jose lawyer who is not qualified to practice there will be of little help. If no suit has been filed yet, and the main problem is cash flow, an experienced settlement negotiator or bankruptcy lawyer is often more helpful.
